Refinancing is the replacement of an existing debt obligation with another debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as inherent risk, projected risk, political stability of a nation, currency stability, banking regulations, borrower’s credit worthiness, and credit rating of a nation. In many industrialized nations, a common form of refinancing is for a place of primary residency mortgage.
The key pointer to consider upon whether or not to refinance a mortgage loan ultimately depends on the individual’s financial plans and current commitments. This article will run through the PRO’S and CON’s of refinancing in GENERAL
1. Lower Interest Rate
the opportunity to obtain a lower interest rate is a top reason to refinance a mortgage loan. For cash-trapped homeowners, it’s a solution that can keep them in their home and preserve their credit, as a refinance can not only lower the interest rate on a mortgage loan, but also the mortgage payment.
For instance, the monthly difference on a $250,000 mortgage loan with a 6% interest rate and a 4% interest rate is nearly $300 per month. For anyone struggling financially, a $300 mortgage decrease can be the break they need to stay in their home.
2. Convert an Adjustable Rate Mortgage to a Fixed Rate
Adjustable rate mortgages (ARM) typically feature lower rates for the first few years of the mortgage term than fixed-rate mortgages, which is why they’re popular choice among some home buyers, For example, you could have an ARM with a fixed period of one year or ten years, during which time the interest rate won’t change. However, the interest rate shifts when the initial fixed period expires. It adjusts according to a benchmark index, such as the LIBOR, which can trigger an interest rate hike and a higher mortgage payment.
ARMs are ideal for people who foresee living in their houses for only a short length of time. But if you plan on sticking around for a several years, a fixed rate is your best bet. Predictable payments coupled with historically low rates make refinancing into a fixed rate mortgage an excellent deal for many people.
3. Cash Out Your Equity
Equity is the difference between your house’s worth and what you owe the mortgage lender, and selling your house is one way to tap your equity. But if you’re not ready to move, another option is a cash-out refinance. You basically borrow against your equity and refinance for more than your house’s current principal balance. Then, use the additional cash to pay off your debt, make home improvements, start a business, or put toward your kids’ college tuition.
Of course, this can also be a downside, as it gets you deeper in debt and may increase your mortgage payment. Plus, trading credit card and other unsecured debt for debt secured by your home could lead to you losing your home in the event that you can’t make mortgage payments. This wouldn’t necessarily be the case if you default on your credit card debt.
1. The break-even period is too long.
The break-even period is the number of months it wil take you to recoup the costs of closing a new loan. To calculate your break even period, you’ll need to know how much the closing costs will be on your new loan and what your new interest rate will be. You should be able to get an estimate of these figures from a lender. There is no magic number that represents an acceptable break-even period – it depends on how long you plan to stay in the house and how certain you are about that prediction.
2. The long-term costs are too high.
Refinancing to lower your monthly payment is great – unless it hurts you significantly in the long run. If you’re several years into a 30-year mortgage, you’ve paid a lot of interest but not much principal. Refinancing into a 15 – year mortgage will probably increase your monthly payment, possibly to a level that you can’t afford. if you start over again with a new 30-year mortgage , you’re starting with almost as much principal as you had at the beginning of your current mortgage. While your new interest rate will be lower, you’ll be paying it for 30 years. So your long-term savings might be insignificant or the loan might even cost you more in the long run.
If lowering your monthly payment means the difference between staying current on a new, lower payment and defaulting on a current, higher payment, you might find this long-term reality acceptable. But if you can afford your current mortgage payment, you might now. (For related reading, see Mortgages: The ABCs of Refinancing)
3. You’d have to move into an ARM to meaningfully lower your rate.
Let’s say you already have a low interest rate: 5% on a 30-year fixed-rate mortgage. If you refinanced into another 30-year fixed at 4.5% the monthly savings would not be substantial unless you have a mortgage several times larger than the national average.
getting an adjustable-rate mortgage (ARM) might look like a great idea. ARMs have the lowest interest rate available: Quicken Loans advertises rates as low as 2.75% for example, Advertised rates are so low that it might seem crazy not to take advantage of them, especially if you’re planning to move by the time the ARM resets. Surely the housing market will have recovered in five or seven years and you’ll be able to sell, right?
The thing is, rates are so low right now (around 4.5% for a 30-year, fixed-rate mortgage) by both historical and absolute standards that they aren’t likely to be significantly lower in the future. So you’ll probably either face significantly higher interest payments when the ARM resets, if you are able to refinance your way out of an ARM, or if interest payments if you manage to sell and buy a different home.
If you already have a low fixed interest rate and you’re managing your payments. you might want to stick with the sure thing, An adjustable-rate mortgage is usually much riskier than a fixed-rate mortgage. It might pay off and save you thousands of dollars – or it might end up costing you thousands of dollars or even force you out of your home. (For related reading, see This ARM Has Teeth)
4. You can’t afford the closing costs.
There isn’t really any such thing as a no-cost refinance. You either pay the closing costs out of pocket or you pay a higher interest rate. In some cases, you’re allowed to roll the closing costs into your loan, but then you’re paying interest on them for as long as you can have that loan.
Can you afford to spend several thousand dollars right now on closing costs, or do you need that money for something else? If you’re looking at a no-cost refinance, Is the refinance still worthwhile at the higher interest rate? If you’re looking at a rolling the closing costs into your loan, consider that $6,000 at 4.5% interest for 30 years will cost you approximately $5,000 extra n the long run compared to just paying the money out-of-pocket now. (For related reading, see The True Economics Of Refinancing A Mortgage)
The Bottom Line The only person who can decide wether it’s a good time to refinance is you – and if you want a professional opinion, you’ll be more likely to get an unbiased answer from a fee-based financial advisor than from someone who wants to sell you a mortgage. The details of your individual situation, not the market, should be the biggest determining factor in whether you choose to refinance.
(Watch Out For “Junk” Mortgage Fees.)
ADDITIONAL TIPS:
If you have decided to transfer the balance of your loan to a new bank, these are the documents you might need:
· A transfer request letter to your current home loan provider, after which you should receive a consent letter or No Objection Certificate (NOC) as well as your outstanding loan amount statement.
· Sales and Purchase Agreement or Title Copy
· Latest 3 or 6-months salary slip
· Your personal bank statement
· Latest EA form
· Latest EPF statement
· Latest income tax form
· Latest 6 months housing loan statement
· Letter of offer from the previous bank
· Current valuation of property